MAKING CENTS: You can’t borrow your way out of debt

As consumers, we learned the hard way that consolidating credit cards or rolling that card debt into a bigger home mortgage doesn’t solve the real problem; too much debt. For some reason, our federal government is having a tough time adjusting to this common principal of economics.

By John Napolitano

The Patriot Ledger, Quincy, MA

By John Napolitano

Posted May. 4, 2013 at 12:01 AM
Updated May 4, 2013 at 4:14 AM

By John Napolitano

Posted May. 4, 2013 at 12:01 AM
Updated May 4, 2013 at 4:14 AM

COMMENTARY

» Social News

As consumers, we learned the hard way that consolidating credit cards or rolling that card debt into a bigger home mortgage doesn’t solve the real problem; too much debt. For some reason, our federal government is having a tough time adjusting to this common principal of economics.

I’m not saying that what the Fed did by expanding its balance sheet was wrong, but I am saying that the short-term fixes that made us all feel a little better are not likely to be the fixes that solve our economic woes in the long term. And the short term fixes did more than make us feel better as people, it made your investments feel better as the financial markets have soared since the famous quantitative easing process began a few years back.

In fact, QE 3, the Feds latest round of pumping liquidity into the economy is adding about $85 billion per month into the economy. Even with that massive amount of stimulus, our gross domestic product (GDP), the measurement of goods and services produced here in the USA is only growing by about 2 percent per year. For market watchers, this is a troubling sign that raises the question about our financial markets, and why they have risen so precipitously over the past year.

If you are wondering if I am turning sour on our markets here in the U.S., the answer is yes. I wonder just how sustainable this current rally is under the facts and circumstances as they currently exist. In fact, it appears as if the trends are going in a direction that typically precedes a market slowdown or correction.

This past week, the U. S. manufacturing index has declined by almost 10 percent. That’s a pretty big drop for an economy that is allegedly in recovery; something that you don’t ordinarily see during a strong rebound.

The same can be said about falling interest rates. The interest rate tool is one of the Feds most powerful tools at stimulating an economy that is stalling. But this time, equity markets are rising and the rate for the 10 year U.S. Treasury continues to fall. One of these two is headed in the wrong direction, and I’m concerned that it is not the interest rate.

Another indicator of economic strength is copper. Copper prices typically rise when an economy is in recovery. Recently we’ve seen copper prices soften considerably along with many other metals and inflation hedge type of asset classes.

None of these should keep you up at night when considered alone, but the combination of them all make me wonder if we are not headed into another soft spot or at least a market correction.

Stimulus may have kept us out of the throes of another great depression, but has it really made things better under the surface? Our government has delivered almost $4 trillion in stimulus to generate about $1 trillion in growth. How would your boss react if you did that with your corporate resources?